Ukraine as part of the European energy market - speech by Vice-President Šefčovič at the Energy panel at International Conference for Reform in Ukraine

Kyiv, 28 April 2015

When Ukraine decided to join the Energy Community in 2010, it was a clear sign of its intention to become part of the European energy market and to build a competitive market with strong interconnections with all its neighbours. It was at the same time a commitment to undertake fundamental reforms in the energy sector, overhauling the inherited Soviet model of energy markets.

We all know that until last year not much happened in this direction. On the contrary, transparency decreased and business empires, closely linked to the country's leadership, made colossal gains. This was among the main reasons why people took to the streets – to the Maidan – in November 2013.

The consequences are well known: rent seeking, super profits, increasingly expensive subsidies and an acute lack of investments threaten not only energy supply, but also the entire Ukrainian economy.

In the aftermath of the "Maidan" events, the political conditions were put in place to seriously tackle energy sector reforms; Minister Demchyshyn has already outlined the achievements so far and the main directions and challenges ahead.

Let me briefly stress here what has been achieved in very practical terms towards integrating the Ukrainian energy sector into that of the EU:

As recently as in 2013, Ukraine received less than 10% of its imported gas from the EU, in 2014 it rose to 26%, and in 2015 gas imports from the EU could be far more, even up to 50%. This has already saved Ukraine a great amount of money and has increased its energy security significantly – including during the critical winter period. This was only possible through the close cooperation between the governments and companies of Ukraine, Slovakia, Poland and Hungary and other EU countries – facilitated by the European Commission. It is an excellent example of what our partnership can achieve!

The new gas law, adopted by the Rada on 9 April, will now bring Ukraine's gas sector legislation in full compliance with the EU energy market. The Government has now six months to fully implement this decision by adopting the relevant secondary legislation. This will open up new ways of cooperation and new avenues for investment. I have already spoken with several European companies on this and they concur that the new legal framework will vastly improve the investment climate, if fully implemented. And we should specifically look at fully utilising Ukraine's gas storage and transport system for the energy security of the wider Central-Eastern European region.

Also on energy efficiencyand renewables, our cooperation is already starting to bear fruit. Over the past year, the participation of Ukrainian towns and cities in the Covenant of Mayors, an EU network to share best practices on energy efficiency, has more than doubled. Currently 73 municipalities have signed up, representing some 10% of Ukraine's population. Cities representing an additional 9% of the population are planning to join the Covenant of Mayors. They all have already or will develop Sustainable Energy Action Plans, which will lead to energy savings of at least 20%. Many cities have already received support from the European Commission in the last couple of years to develop these plans and implement pilot programmes. Among the frontrunners are 11 cities which have been selected for their priority investment projects which will be supported by the EBRD.

Much more is in the pipeline, and we will discuss it here in our energy panel. I am particularly glad to see the presence of national Ministers here with us, and that a number of EU Member States are actively pursuing energy cooperation projects to enable Ukraine to play an active role in the European energy market.

But many will still ask how Ukraine can play an active role in the European energy market. Or how can Ukraine be a partner for the Energy Union?

In our Energy Union package we have made clear that the Commission, together with the High Representative, should develop an active agenda to strengthen the EU's external policy. Ukraine is one of the cornerstones of such a policy, and we would therefor like to upgrade our Strategic Energy Partnership with Ukraine.

Looking at Ukraine's energy sector, there are at least three critical elements to answer this question:

Establish an open and competitive Ukrainian market;

Increase interconnections;

Expand international partnerships.

Everybody agrees that without a competitive Ukrainian energy market, energy costs will remain prohibitively high. The service quality would also deteriorate as the necessary investments for the modernisation of the energy sector will not be forthcoming. A number of fundamental pieces of legislation along these lines are therefore being prepared with the close support and involvement of experts from the Energy Community, the European Commission, EU Member States, and International Financial Institutions. I would just like to mention the functioning of a truly independent energy regulator, an electricity market with separation of and equal and fair access to transmission infrastructure, and the reform of Naftogaz. Perhaps somewhat less obvious to some energy market players but of equal importance are clear rules for the metering and billing of energy consumption at all levels.

So let me come to interconnectors as a key condition to allow a European energy market to function. The existing gas interconnectors have already been upgraded to allow for the increased EU gas supplies to Ukraine, which I have already mentioned. More can and will be done in the future.

Just as a reminder, the EBRD and the EIB already provide funding for modernising Ukraine's gas transmission system with so far €300 million and the planning of new interconnectors has already started. The most advanced plans at the moment are the plans to build a new gas interconnector which will bring LNG from Poland to Ukraine. This would increase Ukraine's energy security even further.

Interconnectors will also play a crucial role in allowing the full use of Ukraine's gas storage and transport system. The latter play an important role in ensuring the energy security of the wider Central-Eastern European region.

This brings me to my third element: International cooperation and partnerships. Playing an active role in the European energy market, would allow Ukraine to benefit will profit from international partnerships; be it in the most effective use of its very powerful gas storage system, from its advantages as a transit country, but also to realise its huge potential for energy efficiency.

A precondition to this is of course Ukraine's continuation on its path of energy sector reform. Transparency has to be improved, the necessary legal changes have to be adopted and implemented. Insider privatisations and double pricing regimes should be relicts of the past. Only with a stable business environment will Ukraine become attractive for international investors.

Partnerships and investments in the gas sector will be greatly facilitated by the Naftogaz reform, which will be pursued in full compliance with the EU's energy market rules, including the unbundling of transmission assets. Whereas we have started with the gas sector, the European Commission is very much willing to support such international partnerships also in other sectors.

Attracting new investments is particularly important for the generation sector. Ukrainian power plants are very old and inefficient; in fact, only one thermal power plant has been built after Ukraine's independence. Clearly, such an investment challenge can only be mastered if clear rules and investor confidence exist. Any non-transparent or corrupt schemes would be poisonous.

If Ukraine were to increase energy efficiency to the EU's average levels, annual energy savings would be about 34 billion cubic metres of natural gas[1]. This is more than the entire consumption of Spain! It is equal to the projected levels of imports of gas for Ukraine. Hence, in combination with expanding its domestic gas production, Ukraine could actually export gas!

The potential for energy savings in Ukraine is huge across all sectors. This is also true for its renewable energies, such as biomass, which is largely unexploited. However, the biggest room for savings is probably in the buildings and district heating sectors. In order to attain this potential, Ukraine will need to introduce and implement clear and demanding legislation and supporting policy measures, which also include funding.

The EU has already gained a lot of experience in the practical implementation of the EU energy efficiency legislation, which we would be happy to share. Ukraine has the skills, expertise and capacity to operate its energy system effectively, to build and use innovative energy and energy savings technologies, and to create economic growth and a large number of jobs in the process.

Rest assured that you can count on my full support to realise this huge potential and to finally dig up all these "hidden treasures". As mentioned, the potential and the synergies for both Ukraine and the EU have been clearly illustrated by the joint 2014 gas "stress tests". It is now crystal clear that the more we cooperate, coordinate and integrate, the better our all energy security becomes.